Tag: Antitakeover


Do Takeover Defenses Deter Takeovers?

Jonathan Karpoff is Professor of Finance at the University of Washington. This post is based on an article authored by Professor Karpoff; Robert Schonlau, Assistant Professor of Finance at Brigham Young University; and Eric Wehrly, Finance Instructor at Seattle University. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here), The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen, and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

The G-index and E-index are workhorses of empirical corporate finance research. Each counts the number of takeover defenses a firm has and is often used as a summary measure of the firm’s protection from unsolicited takeover bids. But do these indices actually measure takeover deterrence?

This is an important question because a substantial number of empirical findings and their interpretations are based on the assumption that takeover defense indices do indeed measure takeover deterrence. For example, researchers have used the G-index and E-index to examine whether takeover defenses are associated with various firm outcomes including low stock returns, low firm value, acquisition returns, takeover premiums, increased risk taking, internal capital markets, credit risk and pricing, operating performance, the value and use of cash holdings, and corporate innovation. Researchers also have used takeover indices to examine whether takeover defenses serve primarily to entrench managers at shareholders’ expense, or to increase firm value through bargaining or contractual bonding.

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Foreign Antitakeover Regimes

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

The confluence of a number of overlapping factors—including an uptick in global and cross-border M&A activity, a resurgence in unsolicited takeover offers, the continued flow of tax inversion transactions, and the growth of activism in non-U.S. markets—means that U.S. companies and investors are more often facing unfamiliar takeover (and antitakeover) regimes as they evaluate and pursue offers for foreign targets. While experienced dealmakers are often well-versed in the nuances of friendly transactions with a foreign seller, the defenses available, and sometimes unavailable, to foreign companies facing unsolicited or hostile offers occasionally come as a surprise and complicate the pursuit or defense of these bids.

While a comprehensive survey of antitakeover regimes in various foreign jurisdictions is well beyond the scope of this post, it is instructive to highlight a number of examples where the regime—mandatory or permissive—departs significantly from U.S. practices, even in countries with well-developed legal systems and capital markets.

In a number of jurisdictions, the applicable takeover rules can be seen to facilitate, or even encourage, offerors in taking rejected overtures to the public shareholders:

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Why Do Dual-Class Firms Have Staggered Boards?

The following post comes to us from Mira Ganor, professor at the University of Texas School of Law. Recent work from the Program on Corporate Governance about staggered boards includes: How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (discussed on the Forum here).

The paper, Why Do Dual-Class Firms Have Staggered Boards?, which was recently made publicly available on SSRN, identifies a relatively high incidence of the combination of two of the strongest anti-takeover mechanisms: a dual-class capital structure with a staggered board. On its face this combination seems superfluous and redundant. If we already have a dual-class capital structure, why do we need a staggered board?

Even more puzzling are the results of the empirical studies of the combined use of staggered boards and dual class capital structures that find a negative correlation between staggered boards and firm value (as measured by Tobin’s Q) similar to the correlation found in firms with single class capital structures. This statistically significant and economically meaningful correlation persists even when controlling for special cases such as founder firms and family firms. Similarly, there are no significant changes in the results when controlling for effective dual class structures, i.e., dual class structures that grant de jure control and not merely the likelihood of de facto control.

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Do Takeover Laws Matter? Evidence from Five Decades of Hostile Takeovers

The following post comes to us from Matthew Cain, Financial Economist at the U.S. Securities and Exchange Commission; Stephen McKeon of the Department of Finance at the University of Oregon; and Steven Davidoff Solomon, Professor of Law at the University of California, Berkeley.

The takeover battle for Erie Railroad is legend. In 1868, Cornelius Vanderbilt, the railroad baron, began to build an undisclosed equity position in Erie. When the group controlling Erie discovered this, they quickly acted to their own advantage, issuing a substantial number of additional shares of Erie stock for Vanderbilt to purchase. One of the managers, James Fisk, purportedly said at the time that “if this printing press don’t break down, I’ll be damned if I don’t give the old hog all he wants of Erie.” The parties then arranged for their own bought judges to issue dueling injunctions prohibiting the other from taking action at Erie. The battle climaxed when Erie’s management fled to New Jersey with over $7 million in Erie’s funds. By the time the dust settled, they were still in control and Vanderbilt was out over $1 million (details from Gordon, 2004; Markham, 2002).

The Erie story is apocryphal, but informative for any attempt to measure the effect of takeover laws. Takeover laws are enacted to regulate takeover activity, and they often take the form of anti-takeover laws intended to thwart hostile takeovers. However, these laws can have the opposite effect of their intended purpose. Although they provide protection to targets, they also implicitly rule out certain defensive tactics and therefore provide protection and increased certainty for prospective hostile bidders. In the case of Erie, it is the bidder that may have benefited from more legal structure, not the target.

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“Just Say No”

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Sabastian V. Niles.

On October 22, 2014, Institutional Shareholder Services issued a note to clients entitled “The IRR of ‘No’.” The note argues that shareholders of companies that have successfully “just said no” to hostile takeover bids have incurred “profoundly negative” returns. In a note we issued the same day, we called attention to critical methodological and analytical flaws that completely undermine the ISS conclusion. Others have also rejected the ISS methodology and conclusions; see, for example, the November analysis by Dr. Yvan Allaire’s Institute for Governance of Public and Private Organizations entitled “The Value of ‘Just Say No’” and, more generally, a December paper by James Montier entitled “The World’s Dumbest Idea.” Of course, even putting aside analytical flaws, statistical studies do not provide a basis in individual cases to attack informed board discretion in the face of a dynamic business environment. The debate about “just say no” has been raging for the 35 years since Lipton published “Takeover Bids in the Target’s Boardroom,” 35 Business Lawyer p.101 (1979). This prompts looking at the most prominent 1979 “just say no” rejection of a takeover.

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The Law and Finance of Anti-Takeover Statutes

Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law. This post is based on a paper co-authored by Professor Kahan and Emiliano M. Catan at the New York University School of Law.

Over the last 15 years, numerous economics articles, many published in top finance journals, have examined the effect of takeover law on performance, leverage, managerial stock ownership, worker wages, patenting, acquisitions, and other firm actions. These studies have concluded, among other things, that anti-takeover laws are associated with a decline in managerial stock ownership, and increase in wages, and a decline in dividend payout ratios.

From a legal perspective, however, the varying methods that financial economists use to measure the takeover protection afforded by state law make little sense. Economists generally look either at whether (and when) a state adopted a business combination statute; at when a state adopted the first of a set of statutes (typically, business combination statutes, control share acquisition statutes, and fair price statutes); or at how many different types of statutes a state has adopted.

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Delaware’s Choice

Guhan Subramanian is the Joseph Flom Professor of Law and Business at the Harvard Law School and the H. Douglas Weaver Professor of Business Law at Harvard Business School. The following post is based on Professor Subramanian’s lecture delivered at the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In November 2013 I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.

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The Case for an Unbiased Takeover Law

The following post comes to us from Luca Enriques, Nomura Visiting Professor of International Financial Systems at Harvard Law School and Professor of Business Law at LUISS University (Rome), Ronald J. Gilson, Charles J. Meyers Professor of Law and Business at Stanford Law School and Marc and Eva Stern Professor of Law and Business at Columbia University School of Law, and Alessio M. Pacces, Professor of Law & Finance, Erasmus School of Law, Rotterdam.

Takeovers remain the most controversial corporate governance mechanism. According to pro-takeover commentators, takeovers are generally beneficial for corporate governance. Takeovers can displace poorly performing managers and facilitate corporate restructuring. From this perspective, regulation should encourage takeovers. On the opposite side of the debate, those who oppose hostile takeovers argue that they can disrupt well-functioning companies and encourage short-termism. From this point of view, policies that hamper takeovers are favored.

In our paper The Case for an Unbiased Takeover Law (with an Application to the European Union), we reject a categorical pro- or anti-takeover position. While hostile and friendly takeovers may be efficient in the aggregate, individual takeovers and individual companies’ exposure thereto are efficient or inefficient depending on a variety of factors. These factors include the production functions of companies, the conditions in the relevant industry, the problems confronting the corporation and the best response to those problems. Because these all may differ from company to company and over time, so also may the appropriate stance to takeovers differ. Consequently, we posit that takeover regulation should sanction the efforts by individual companies to devise a takeover regime appropriate to their own, mutable circumstances. In other words, takeover regulation should be limited to a set of optional rules.

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Takeover Defenses as Drivers of Innovation and Value-Creation

The following post comes to us from Mark Humphery-Jenner of the Australian School of Business at the University of New South Wales.

In the paper, Takeover Defenses as Drivers of Innovation and Value-Creation, forthcoming in the Strategic Management Journal, I analyze the role of anti-takeover provisions in ameliorating agency conflicts of managerial risk aversion in certain types of companies.

The desirability of anti-takeover provisions (ATPs) is a contentious issue. ATPs can lead to shareholder wealth-destruction by insulating managers from disciplinary takeovers and enabling them to engage in empire building. However, without ATPs, managers of hard-to-value (HTV) firms, which might trade at a discount due to valuation-difficulties, are exposed to ‘opportunistic takeovers’ (which aim to take advantage of low stock prices), potentially causing managerial myopia and under-investment in innovative projects. Thus, in HTV firms, ATPs might serve as credible commitments to encourage managers to make value-creating investments, but in easier-to-value firms, they might lead to inefficient governance.

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Taxing Control

The following post comes to us from Richard M. Hynes, Professor of Law at University of Virginia School of Law.

Early corporate law scholarship argued both that anti-takeover devices are inefficient (they reduce the value of the firm) and that firms adopt efficient governance terms before they make their initial public offering. Some of this scholarship asserted that firms go public without anti-takeover devices and adopt them later when agency costs are higher. However, subsequent research revealed that most firms adopt anti-takeover devices before completing their initial public offerings. For example, over eighty-six percent of firms that have gone public in 2012 have a staggered board of directors, and both Google and Facebook chose dual-class capital structures that allow the founders to retain voting control disproportionate to their economic stake.

The literature offers a number of explanations for this apparent puzzle. Capital market imperfections may prevent initial public offering prices from reflecting differences in corporate governance terms. Firms may choose inefficient terms due to bad legal advice or because of frictions in the market for financing prior to the initial public offering. Anti-takeover protections could be efficient after all, at least for some firms, because they correct for myopic investors or some other problem. Finally, managers may choose anti-takeover provisions to signal something about their firms. In an essay forthcoming in the Journal of Corporation Law I offer a very different explanation, one based on the tax code.

My argument begins with a variant of one of the existing explanations for anti-takeover protections. The heart of the argument is that managers are not driven solely by a desire for material gain but derive some happiness or utility from the control they exercise over their firm. To the extent that managers derive happiness from control, they may not choose governance terms that maximize the dollar value of the firm. However, unless there is some contracting failure, they will still choose efficient terms — terms that maximize the total value of the firm (the dollar value plus the control value).

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